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    Dropping Product Line of Margie Knall, Inc.

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    4. (TCO D) Mr. Earl Pearl, Accountant for Margie Knall, Inc. has prepared the following product-line income data:
    PRODUCT
    Total A B C
    Sales................................................$ 100,000........$50,000.........$20,000...........$30,000
    Variable Expenses.............................. 60,000..........30,000............10,000.............20,000
    Contribution Margin............................. .40,000..........20,000............10,000.............10,000
    Fixed Expenses:
    Rent................................................. .5,000...........2,500..............1,000...............1,500
    Depreciation..................................... 6,000...........3,000..............1,200................1,800
    Utilities.............................................4,000...........2,000.................500................1,500
    Supervisors' salaries....................... 5,000.......... 1,500.................500................3,000
    Maintenance....................................3,000...........1,500..................600..................900
    Administrative Expenses................ 10,000...........3,000.................2,000..............5,000
    Total Fixed Expenses........................ 33,000..........13,500...............5,800.............13,700
    Net Operating Income........................ $7,000..........$6,500.............$4,200............($3,700)
    The following additional information is available:
    ? The factory rent of $1,500 assigned to product C is avoidable if the product were dropped.
    ? The company's total depreciation would not be affected by dropping C.
    ? Eliminating product C will reduce the monthly utility bill from $1,500 to $800.
    ? All supervisors' salaries are avoidable.
    ? If product C is discontinued, the maintenance department will be able to reduce monthly expenses from $3,000 to $2,000.
    ? Elimination of product C will make it possible to cut two persons from the administrative staff, currently, their combined salaries total $2,000.
    Required: Prepare an analysis showing whether product C should be eliminated. Articulate your findings.

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    https://brainmass.com/business/accounting/dropping-product-line-of-margie-knall-inc-93632

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    I have taken into account the affect of dropping product C and adjust to find out the new total sales and new total expenses according to the information given. I also used the new total maintenance cost of $2,000 as the information said that if product C is discontinued, the maintenance department will be able to reduce monthly expenses from $3,000 to $2,000 even though the sum of the maintenance from product A and B will exceed.
    If product C is eliminated, the result will be as follows: -
    ...

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